KOLKATA: Ratings firm Icra sees a strong demand for solar energy in India amid a favorable regulatory and policy environment.
In a research report on the sector, Icra said significant decline in solar photovoltaic module prices and the competitive bidding route being adopted by state distribution utilities have led to an improved cost competitive scenario for the solar PV-based energy segment.
"Even assuming the energy demand growth at 7% on y-o-y basis and solar renewable purchase obligation (RPO) increasing to 2.25% till FY 2022 as against 3.0% as recommended in the National Tariff Policy, the cumulative incremental solar-based energy capacity requirements for the period from FY16 to FY22 is about 19 GW, as per ICRA estimates," said Girish Kadam, vice-president, corporate sector ratings, at Icra.
According to the report, the cost impact of sourcing solar energy by distribution utilities to meet solar RPO level of 2% by FY20 on all-India level is estimated to remain limited on their average cost of supply and, in turn, on their average retail tariffs.
If solar RPO target levels were to revise upwards, assuming to 5% by FY20 on a conservative basis, incremental impact on average power purchase cost for the distribution utilities is estimated to be relatively higher, i.e. at about 14 paisa/kWh for FY20, which corresponds to about 2.4% increase on average retail tariff on all India basis, the report said.
The report, however, notes that the solar sector remains exposed to regulatory challenges arising out of inconsistency in solar RPO norms and poor compliance of them by the obligated entities.
At present, the RPO norms vary widely across states (i.e 0.2% to 2% against 1% for FY16 as suggested under the National Tariff Policy) with only a few states having a trajectory in place till FY21-22. Further, the RPO levels for majority of the states continue to remain lower than the RPO trajectory suggested.
Given that state-owned distribution utilities are key obligated entities, solar energy projects remain exposed to counter party credit risks, since many of these utilities continue to have a stretched financial position.
The fundamental improvement in their financial position remains crucial in the long run, as this will also enable them to honour the payments and the solar RPO norms in a timely manner, the report said.